Pitney Bowes Inc: Form 10-Q for the period ended Mar 31, 2025

Forward-Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. We caution readers that any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the Securities Exchange Act of 1934 (Exchange Act) may change based on various factors. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current expectations and assumptions, which we believe are reasonable; however, such statements are subject to risks and uncertainties, and actual results could differ materially from those projected or assumed in any of our forward-looking statements. Words such as "estimate," "target," "project," "plan," "believe," "expect," "anticipate," "intend," "will," "forecast," "strategy," "goal," "should," "would," "could," "may" and similar expressions may identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Forward-looking statements in this Form 10-Q speak only as of the date hereof.

Although we believe the expectations reflected in any of our forward-looking statements are reasonable, our results of operations, financial condition and forward-looking statements are subject to change and to inherent risks and uncertainties disclosed or incorporated by reference in our filings with the Securities and Exchange Commission. Other factors which could cause future financial performance to differ materially from expectations, include, without limitation:

• changes in postal regulations or the operations and financial health of posts in the U.S. or other major markets, or changes to the broader postal or shipping markets
• accelerated or sudden decline in physical mail volumes
• inability to compete effectively with our Sending Technology Solutions competitors
• changes in trade policies, tariffs and regulations
• the loss of some of our larger clients in our Presort Services segment
• global supply chain issues adversely impacting our third party suppliers' ability to provide us products and services
• periods of difficult economic conditions, the impacts of inflation and rising prices, higher interest rates and a slow-down in economic activity, including a global recession, or a U.S. government shutdown, to the company and our clients
• changes in foreign currency exchange rates
• changes in labor and transportation availability and costs
• inability to successfully execute on our strategic initiatives
• loss of key employees and accumulated knowledge and ability to attract and retain employees
• changes in government contracting regulations and inability to comply
• inability to protect our intellectual property rights and intellectual property infringement claims
• our success in developing and marketing new products and services and obtaining regulatory approvals, if required
• changes within our senior management and Board of Directors
• expenses and potential impacts resulting from cyber-attacks or other cybersecurity incidents affecting us or our suppliers
• inability to comply with data privacy and protection laws and regulations
• interruptions or difficulties in the operation of our cloud-based applications and systems or those of our suppliers
• changes in credit ratings, capital market disruptions, decline in cash flows, noncompliance with debt covenants or significant withdrawals by depositors at the Pitney Bowes Bank that adversely impact our ability to access capital markets at reasonable costs
• the potential for future interest rate increases on our cost of debt
• our success at managing customer credit risk
• the risks and uncertainties associated with the Ecommerce Restructuring
• changes in banking regulations, major bank failures or the loss of our Industrial Bank charter
• changes in tax rates, laws or regulations
• changing expectations and regulations in the areas of Environmental, Social and Governance ("ESG")
• acts of nature and the impact of a pandemic on the Company and the services and solutions we offer
• shareholder activism

Further information about factors that could materially affect us, including our results of operations and financial condition, is contained in Item 1A. "Risk Factors" in our 2024 Annual Report, as supplemented by Part II, Item 1A in this Quarterly Report on Form 10-Q.

Ecommerce Restructuring

On August 8, 2024, we entered into a series of transactions designed to facilitate an orderly wind-down of a majority the Company’s Global Ecommerce reporting segment. In connection with the wind-down, an affiliate of Hilco Commercial Industrial, LLC (“Hilco”) subscribed for 81% of the voting interests in the subsidiary, DRF Logistics, LLC owning a majority of the Global Ecommerce segment’s net assets and operations (DRF Logistics, LLC and its subsidiary, DRF LLC, the “Ecommerce Debtors”) for de minimis consideration (the “GEC Sale”), with a subsidiary of Pitney Bowes retaining 19% of the voting interests and 100% of the economic interests. Subsequent to the GEC Sale, the Ecommerce Debtors, at the direction of their own governing bodies, filed petitions to commence Chapter 11 bankruptcy cases and conduct an orderly wind down of the Ecommerce Debtors (the “GEC Chapter 11 Cases”). We refer to the GEC Sale, the GEC Chapter 11 Cases and any associated transactions as the “Ecommerce Restructuring”.

As a result of the Ecommerce Restructuring, certain revenues and expenses for the period ended March 31, 2024 are reported as discontinued operations in our Condensed Consolidated Financial Statements. Prior periods have been recast to conform to the current period presentation. For segment reporting purposes, the remaining portion of Global Ecommerce in continuing operations is now reported as "Other" and includes the revenue and related expenses of a cross-border services contract and prior operations and shared services. See Note 4 for further information.

Outlook

Within SendTech Solutions, mailing-related revenues are expected to decline driven by lower meter populations and a higher mix of lease extensions versus new equipment sales and leases. We expect this decline to be partially offset by growth in our shipping offerings, particularly our SaaS solutions. The shift to lease extensions will result in declining equipment sales in the near term, but more stable and continued cash flows over the lease term.

Within Presort Services, we expect revenue and margin improvements from the investments we made in automation and technology to drive increased efficiencies and productivity.

The U.S. government has recently announced a broad range of tariffs on goods imported into the United States. The amount of tariffs imposed has been volatile and is different for each country of origin. We are continuously assessing the potential impact these tariffs may have on our operations and considering various mitigating actions.

RESULTS OF OPERATIONS

OVERVIEW OF CONSOLIDATED RESULTS

Constant Currency

In the tables below, we report the change in revenue on a reported basis and a constant currency basis. Constant currency measures exclude the impact of changes in currency exchange rates from the prior period under comparison. We believe that excluding the impacts of currency exchange rates provides investors with a better understanding of the underlying revenue performance. Constant currency change is calculated by converting the current period non-U.S. dollar denominated revenue using the prior year’s exchange rate.

Financial Results Summary - Three Months Ended March 31:

Revenue decreased $28 million in the first quarter of 2025 compared to the prior year period due to lower products revenue of $21 million, lower services revenue of $4 million and lower financing and other revenue of $3 million.

Costs of revenue decreased $24 million primarily due to lower cost of products of $12 million, lower cost of services of $9 million and lower cost of financing and other of $3 million.

Total operating expenses decreased $3 million compared to the prior year period primarily due to:

• lower selling, general and administrative (SG&A) expense of $21 million primarily due to lower employee-related expenses of $25 million driven by actions taken under the 2024 Plan;
• lower research and development costs of $3 million primarily due to cost savings initiatives; and
• lower restructuring charges of $2 million driven by actions taken under the 2023 and 2024 Plans; partially offset by
• Other expense in the first quarter of 2025 of $24 million, primarily due to a loss on the redemption/refinancing of debt.

The effective tax rate for the three months ended March 31, 2025 includes a benefit of $2 million for the vesting of restricted stock and the effective tax rate for the three months ended March 31, 2024 includes a charge of $1 million for the vesting of restricted stock. See Note 13 for more information.

As a result of the above, income from continuing operations for the first quarter of 2025 was $35 million compared to $32 million in the prior year period. Net loss for the first quarter of 2024 was $3 million and includes a loss from discontinued operations, net of tax of $35 million. See Note 4 for more information.

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SEGMENT RESULTS

Effective January 1, 2025, we revised our reporting presentation of revenue and cost of revenue in order to better align with our offerings. Additionally, due to a change in how these functions are now managed, we revised our corporate expense allocation methodology to allocate all marketing and innovation expenses to our SendTech Solutions segment. Prior periods have been recast to conform to the current period presentation.

We allocate a portion our total interest expense to finance interest expense, included in Cost of financing and other in our Condensed Consolidated Statements of Operations.

Management measures segment profitability and performance as segment revenues less the related costs and expenses attributable to the segment. Segment results exclude interest, including finance interest expense, taxes, corporate expenses, restructuring charges and other items not allocated to the segments.

SendTech Solutions

SendTech Solutions provides clients with physical and digital shipping and mailing technology solutions and other applications to help simplify and save on the sending, tracking and receiving of letters, parcels and flats, as well as supplies and maintenance services for these offerings. We offer financing alternatives that enable clients to finance equipment and product purchases, a revolving credit solution that enables clients to make meter rental payments and purchase postage, services and supplies, and an interest-bearing deposit solution to clients who prefer to prepay postage. We also offer financing alternatives that enable clients to finance or lease other manufacturers’ equipment and provide working capital.

Financial performance for the SendTech Solutions segment was as follows:

SendTech Solutions revenue decreased $29 million in the first quarter of 2025 compared to the prior year period, which includes an unfavorable adjustment of $4 million related to prior periods. Products revenue declined $21 million primarily due to customers opting to extend leases of their existing advanced-technology equipment rather than purchase new equipment, the impact of the prior year product migration and a significant deal in the prior year. Services revenue declined $6 million primarily due to the declining meter population, which was partially offset by growth in our shipping subscriptions. Financing and other revenue declined $3 million.

Gross margin declined $13 million compared to the prior year period primarily driven by lower revenue; however, gross margin percentage increased to 68.9% from 66.6% driven by headcount reductions and other cost savings initiatives.

SG&A expense declined $12 million, primarily driven by lower employee-related expenses and overall cost savings initiatives.

Adjusted segment EBIT was $95 million in the first quarter of 2025, which includes the $4 million charge from the unfavorable revenue adjustment related to prior periods compared to $94 million for the prior year period.

Presort Services

Presort Services is the largest workshare partner of the USPS and national outsource provider of mail sortation services that allow clients to qualify large volumes of First Class Mail, Marketing Mail, and Marketing Mail Flats/Bound Printed Matter for postal worksharing discounts.

Financial performance for the Presort Services segment was as follows:

Revenue increased $8 million in the first quarter of 2025 compared to the prior year period primarily due to pricing actions despite a 2% decline in total mail volumes. The processing of First Class Mail and Marketing Mail contributed revenue increases of $13 million and $1 million, respectively, which was partially offset by a revenue decrease from Marketing Mail Flats/Bound Printed Matter of $6 million. Prior year revenue includes a $5 million favorable adjustment related to prior periods. See Note 1 for more information.

Gross margin increased $11 million and gross margin percentage increased from 36.8% in the prior period to 41.2% primarily due to the increase in revenue, lower transportation costs of $1 million driven by lane optimization and lower labor costs of $1 million.

SG&A expense declined $4 million compared to the prior year period driven primarily by lower credit loss provision of $2 million and lower employee related expenses of $1 million.

Adjusted segment EBIT was $55 million in the first quarter of 2025 compared to $40 million in the prior year period, which includes the $5 million benefit from the favorable revenue adjustment.

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CORPORATE EXPENSES

The majority of operating expenses are recorded directly or allocated to our reportable segments. Operating expenses not recorded directly or allocated to our reportable segments are reported as corporate expenses. Corporate expenses primarily represents corporate administrative functions such as finance, human resources, legal and information technology.

Corporate expenses were as follows:

Corporate expenses for the first quarter of 2025 decreased $10 million compared to the prior year period primarily due to lower salary expense of $12 million driven by actions taken under the 2024 Plan and lower variable compensation expense of $3 million.

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LIQUIDITY AND CAPITAL RESOURCES

Our ability to maintain adequate liquidity for our operations is dependent upon a number of factors, including our revenue and earnings, our ability to manage costs and improve productivity, our clients' ability to pay their balances on a timely basis and the impacts of changing macroeconomic and geopolitical conditions. At March 31, 2025, we had cash, cash equivalents and short-term investments of $340 million, which includes $43 million held at our foreign subsidiaries used to support their liquidity needs. At this time, we believe that existing cash and investments, cash generated from operations and borrowing capacity under our revolving credit facility will be sufficient to fund our cash needs for the next 12 months.

Cash Flow Summary

Changes in cash and cash equivalents were as follows:

Operating Activities

Cash flows from operating activities for the first quarter of 2025 declined $4 million compared to the prior year period driven primarily by the annual payment of incentive awards, partially offset by higher income and lower cash outflows from discontinued operations.

Investing Activities

Cash flows from investing activities for the first quarter of 2025 declined $34 million compared to the prior year period primarily due to higher investments in loan receivables of $35 million, higher capital expenditures of $3 million and $2 million for a Presort Services acquisition, partially offset by lower cash outflows from discontinued operations of $6 million.

Financing Activities

Cash flows from financing activities for the first quarter of 2025 declined $27 million compared to the prior year period primarily due to the fees to redeem and refinance debt of $21 million and repurchases of our common stock of $15 million.

We paid dividends of $11 million in the quarter. Each quarter, our Board of Directors considers whether to approve the payment of a dividend. We currently expect to continue paying a quarterly dividend; however, no assurances can be given.

Debt and Financing Activities

In the first quarter of 2025, we redeemed the remaining outstanding balance of the Notes due March 2028 and recorded a loss of $17 million in other expense. Additionally, we entered into a new senior secured credit agreement (the "New Credit Agreement"), which provides for $265 million revolving credit facility maturing March 2028, a $160 million term loan maturing March 2028 and a $615 million term loan maturing March 2032. The proceeds were used to repay the outstanding balances of the Term loan due March 2026 and Term loan due March 2028 and for general corporate purposes. We recorded a loss of $8 million in connection with this refinance in other expense. We also purchased an aggregate $23 million of the Notes due March 2027 and Notes due March 2029.

From April 1, 2025 through May 2, 2025, we purchased an additional aggregate 14 million of the Notes due March 2027 and Notes due March 2029.

Under the New Credit Agreement, we are required to maintain (with maintenance tested quarterly) (i) a Consolidated Interest Coverage Ratio (as defined in the New Credit Agreement) of not less than 2.00 to 1.00, (ii) a Consolidated Secured Net Leverage Ratio (as defined in the New Credit Agreement) of no greater than 3.00 to 1.00 and (iii) a Consolidated Total Net Leverage Ratio (as defined in the New Credit Agreement) of no greater than (a) 5.25 to 1.00 for the fiscal quarters ending March 31, 2025 and June 30, 2025, (b) 5.00 to 1.00 for the fiscal quarters ending September 30, 2025 and December 31, 2025 and (c) 4.75 to 1.00 for each fiscal quarter ending on or after March 31, 2026. At March 31, 2025, we were in compliance with these financial covenants and there were no outstanding borrowings under the revolving credit facility. Borrowings under our New Credit Agreement are secured by assets of the Company.

The New Credit Agreement also contains provisions whereby if, on any day between the period commencing on September 14, 2026 and ending on March 15, 2027 the Notes due March 2027 have not been redeemed in full and liquidity is less than an amount equal to the amount to redeem the Notes due March 2027 plus $100 million, the Term loan due March 2028 and any borrowings under the revolving credit facility would become due on such date (the "Pro Rata Springing Maturity Date"), and if on any date during the period beginning on December 14, 2026 and ending on March 15, 2027, the Notes due March 2027 remain outstanding and the Pro Rata Springing Maturity Date has occurred, the Term loan due March 2032 would be become due on such date. We are considering various strategies and fully intend to redeem the Notes due March 2027 before September 2026 either with available cash on hand or refinance through the capital markets.

In connection with the GEC Chapter 11 Cases, the Company, through one of its wholly owned subsidiaries, agreed to provide funding to the Ecommerce Debtors through a DIP Facility. We provided initial funding of $28 million and to-date, have received repayments of $13 million. The remaining balance on the DIP Facility is fully reserved and any future distributions will be recorded as income in the period received.

Off-Balance Sheet Arrangements

At March 31, 2025, there are no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, results of operations or liquidity.

Regulatory Matters

There have been no significant changes to the regulatory matters disclosed in our 2024 Annual Report.

Critical Accounting Estimates

There have been no significant changes to the Critical Accounting Estimates disclosed in our 2024 Annual Report.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to reasonably ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding disclosures.

With the participation of our CEO and CFO, management evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) and internal controls over financial reporting as of the end of the period covered by this report. Our CEO and CFO concluded that, as of the end of the period covered by this report, such disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the required time periods. In addition, no changes in internal control over financial reporting occurred during the quarter covered by this report that materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Notwithstanding this caution, the CEO and CFO have reasonable assurance that the disclosure controls and procedures were effective as of March 31, 2025.